In my recent interview with Acorn Energy CEO John Moore, I asked him if he expected coal to dominate our energy mix in 30 years. His answer was a definitive yes. This jibes with the outlook of the Department of Energy's Energy Information Administration (EIA), which sees coal's share of generation at 47% in 2030, compared with 49% in 2007.
I think this is an important reality that investors need to recognize.
Coal out the wazoo
Utility giant American Electric Power (NYSE:AEP) derives 73% of its electricity generation from coal. That's more than 27 gigawatts of coal-fired capacity -- more than a fifth of global wind capacity, and nearly double the global photovoltaic installed base as of last year. And that's just one company. Across the country, we've got coal plants cranking out cheap, baseload power, and the EIA projects that these assets will "continue to be used intensively."
Of course, with the likely introduction of a federal cap on greenhouse gas emissions, coal-fired power suddenly won't look as cheap. But given our heavy dependence on coal, I think it's reasonable to expect existing plants to get a fair amount of leeway in meeting stricter standards.
You must retrofit!
Operators of existing coal plants will be forced to find ways to significantly reduce emissions. An MIT symposium this year concluded that there's no way to stabilize greenhouse gas levels without retrofitting existing plants for CO2 emissions reduction. Interestingly, nuclear heavyweight Enterra Energy Trust (NYSE:ENT) sponsored the event. The company's CEO shared the following thought in the post-symposium report:
If we are to sustain an effective climate program and grow our economy, we can't kill coal; we have to save it. That may seem strange to hear from a CEO of an electric company with less than 10% of its capacity in coal-fired generation -- but it is the inescapable conclusion of our analysis.
The symposium identified key retrofit technologies, promising lines of R&D, and policy and institutional barriers to CO2 reduction -- all with an eye to prodding policymakers to action.
While efficiency retrofits of older coal plants were found to sport the highest benefit/cost ratio, they're only believed to offer a 4%-5% emission reduction. Symposium participants identified carbon capture and sequestration (CCS) as the most direct pathway to dramatically cutting emissions. AEP is pursuing various CCS technologies with partners like McDermott (NYSE:MDR) and Alstom, as are folks like Peabody Energy (NYSE:BTU) and Royal Dutch Shell (NYSE:RDS-A) (NYSE:RDS-B).
It's worth noting that fewer than half of our country's plants are good candidates for CCS retrofits, which are likely to have a capture cost of $50 to $70 per ton of CO2. Smaller, older, and less efficient plants would require major rebuilds to achieve significant reductions. The costs involved on both fronts are fairly staggering, with the International Energy Agency talking about $700 billion in spending through 2030. Folks like Shaw Group (NYSE:SHAW) are going to be awfully busy, and making an awful lot of money.
So that's the story for existing coal plants. What about shiny, new ones?
Zeal today, gone tomorrow?
I gleaned several valuable insights from a report from the National Energy Technology Laboratory called "Tracking New Coal-Fired Power Plants."
One is that capacity announcements are a poor predictor of actual additions. In 2002, there were 36 gigawatts of announced capacity additions slated to come online through 2007. Just 12% were achieved.
That said, actual additions have really ratcheted up this year, and there are another 20 gigawatts of projects progressing. That means these plants at least have permits in hand, and are much less likely to be canceled. This wave of new construction appears to crest over the next three years. Beyond that point, it's tough to see coal plants proliferating.
Returning to the EIA's outlook, it sees just 18% of capacity additions from 2007 through 2030 coming from coal plants. The costs of environmental compliance appear to be the key driver here. Coal plants are projected to become no cheaper than natural gas combined-cycle, wind, and nuclear by the end of this multidecade period. The EIA doesn't give geothermal much credit, but I expect this generation source to become a serious baseload contender over this time frame as well, despite its current growing pains.
